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Monday, July 11, 2016

Theresa May Poised to Take the Helm in the UK

The topics of Brexit and UK's next Prime Minister are back in the news front-and-center with the overnight announcement that Andrea Leadsom, the most conservative of the remaining candidates, had withdrawn from consideration. That leaves Theresa May as the presumptive new head of the Conservative Party, settling the issue two months ahead of the original September 9th deadline. The exact date of the transition has not yet been set - at least, not as of this writing - but could be within the next few days.

The UK and US markets have greeted the news positively, with US futures pointing to a continuation of Friday's rally. Settling the Prime Minister question early removes a measure of uncertainty, which is always positive for the market. Some caution is warranted now, however, since it does bring the Brexit discussion back to the forefront several months earlier than anticipated. We can expect a bit of volatility as that plays out.

Despite being described as a Euroskeptic, May stated after the vote that "Brexit means Brexit." She has said that there will not be a second resolution, and there will also be a clean break, not some Schrödinger's Cat variant of maybe in, maybe out, maybe both. This implies that a move to invoke Article 50 may come sometime before the end of this year, setting a 2-year negotiations deadline in motion with a potential exit sometime in late 2018 or 2019.

While the monetary cost of executing the exit logistics is an unknown - but likely very high - it will bear careful scrutiny since it will have an impact on companies with UK exposure. The financial impact will likely be lower in the EU, but again, it bears watching.

Of immediate interest will be the policies that May sets forth as the new Prime Minister, and some of those policies could have direct financial impact on companies operating in the UK. Despite being the new leader of the Conservatives, some of her views are as left or even further left than what has been proposed by Labour, at least when it comes to management and oversight of corporations.

May has said, “I want to see changes in the way that big business is governed. The
people who run big businesses are supposed to be accountable to
outsiders, to non-executive directors, who are supposed to ask the
difficult questions, think about the long term and defend the interests
of shareholders. In practice, they are drawn from the same narrow social and
professional circles as the executive team and – as we have seen time
and time again – the scrutiny they provide is just not good enough. So if I’m prime minister, we’re going to change that system – and
we’re going to have not just consumers represented on company boards,
but workers as well.”

She has also pledged to reign in executive pay - which, keep in mind, is already significantly lower in the UK than it is here in the US - and intends to change the shareholder proxy structure to make shareholder votes on pay binding as opposed to recommendations. Neither of the changes she is proposing will entice companies with global reach to remain in the UK following a Brexit that will certainly complicate their cross-border trading both in Europe and through other parts of the world.

Many of her other policy statements are synonymous with the Democratic platform in the US:

“Right now, if you’re born poor, you will die on average nine years
earlier than others. If you’re black, you’re treated more harshly by the
criminal justice system than if you’re white. If you’re a white,
working-class boy, you’re less likely than anybody else to go to
university,”

“If you’re at a state school, you’re less likely to reach the top
professions than if you’re educated privately. If you’re a woman, you
still earn less than a man. If you suffer from mental health problems,
there’s too often not enough help to hand. If you’re young, you’ll find
it harder than ever before to own your own home.”

She has pledged to refocus the Conservative Party to be “at the service of working people" who, she believes, voted for Brexit because they did not feel in control of their lives either in the workplace or in government.

If any of this sounds familiar, it's only because we're hearing the exact same platform in the Presidential elections here in the US.

What it means to us as traders is that we will need to adapt to a less conservative leadership in the UK, a climate that is less business friendly, unknown impacts on foreign exchange for companies operating in both the UK and the EU, and unforeseen strains on cross-border trade. Those of us that only trade US and Canadian stocks still need to be aware of the impact on S&P 500 companies with heavy exposure to Europe. What is certain for now is that these considerations will add to what Janet Yellen consistently calls "headwinds" and it's likely those headwinds will be in our face for the next couple of years.